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Duty to notify Beneficiaries under a labour and material payment bond

Subcontractors may find themselves in a difficult position if an owner or general contractor fails to pay for labour and materials provided to a project. This failure to pay may occur for any number of reasons, but is often a result of a dispute or insolvency. One of the most commonly used methods to mitigate the risk of non-payment by an owner or general contractor is the use of labour and material payment bonds. Under such bonds, an unpaid subcontractor or supplier may claim against the surety bond for the recovery of amounts owed for labour and materials supplied to a construction project. However, in some cases, potential bond claimants may not be aware of the existence of a labour and material payment bond and therefore fail to submit a claim on the bond until after the expiry of the 120-day notice period.

This issue was recently addressed by the Supreme Court of Canada in the Valard v Bird Construction decision and the result imposes a duty to notify of the existence of a bond on participants in the construction pyramid. The facts of the case involved a project in Alberta’s oil sands. Bird Construction (“Bird”) was retained as the general contractor by Suncor. Bird required its electrical sub-contractor, Langford Electric Ltd. (“Langford”), to obtain a labour and material payment bond (“Bond”) which Langford obtained from the Guarantee Company of North America (“GCNA”). The Bond contained the usual 120-day notice provision and named Bird as obligee, Langford as principal, and GCNA as surety.

During the course of project, Langford became insolvent and failed to pay its sub-subcontractor, Valard Construction (“Valard”). Valard was not notified of the Bond’s existence by Bird or Langford and failed to make a claim on the Bond before the 120-day notice period expired. Valard eventually learned of the Bond and filed a claim which was denied for failure to give timely notice, as the notice was given seven months late. Valard sued Bird alleging breach of trust for Bird’s failure to notify Valard of the existence of the Bond.

The trial judge dismissed Valard’s action. Justice Verville found that Bird had no duty to disclose to Valard the existence of the Bond. He stated that there was no wording in the standard provisions of the Bond or the caselaw that imposed a duty on Bird as obligee to protect the interests of potential claimants. The sole purpose of the standard trust wording in the Bond was to overcome the third party beneficiary rule. He noted that a simple inquiry by Valard would have been a “more reliable means” of learning of the Bond’s existence. Under Alberta’s Builder’s Lien Act, there is a right to request information but the right is expressed as a right to request the contract and does not explicitly reference the bond. In other provinces, Ontario included, there is explicit reference in the lien legislation in the right to information section to request information about a labour and material payment bond.

The majority of the Alberta Court of Appeal dismissed Valard’s appeal, affirming the trial judge’s decision that there was no legal duty to inform any potential claimant about the existence of a labour and material payment bond, unless and until there was a clear and unequivocal request for information about the bond.

The Supreme Court of Canada reached a different result. It found that while the Bond did not expressly impose a duty on Bird, as trustee, to protect the interests of beneficiaries by disclosing the Bond’s existence to them, this was not fatal to Valard’s appeal. Though the main source of a trustee’s duties is the trust instrument, the general law which sets out a trustee’s duties, rights and obligations continues to govern where the trust instrument is silent. In other words, despite the fact that the standard bond language does not impose a duty to notify, the general duty of a trustee to act in the best interest of the beneficiary, as set out in the case law, prevailed as a guiding principle.

The Court found that Valard was unreasonably disadvantaged by Bird’s failure to inform it of the Bond’s existence. Valard’s interest under the trust was not so remote that vesting was unlikely and it required knowledge of the Bond in order to enforce it. Bird, as trustee, had a duty to disclose the Bond’s existence to Valard.

The Court acknowledged that labour and material payment bonds serve the purpose of protecting owners and general contractors such as Bird from the risk of work stoppages, liens and litigation overpayment, but for that purpose to be realized beneficiaries must be capable of enforcing the bond.

The Court found as a fact that labour and material payment bonds are uncommon on private oil sands projects based on the uncontradicted evidence provided at trial. The Court determined that the provision in Alberta’s Builder’s Lien Act in relation to requesting a copy of a contract did not absolve the trustee of its fiduciary duty. The Court rejected the argument that Bird was a bare trustee because such a finding assumes that the beneficiary knows of the trust’s existence. In failing to disclose the Bond’s existence, Bird was found to have committed a breach of trust.

The Court found that Bird, as trustee, had a fiduciary duty to disclose to beneficiaries the existence of the trust. The standard is not one of perfection, but “honesty, and reasonable skill and prudence”.[1] What a trustee must do is “highly sensitive to the context in which the particular trust relationship arises”.[2] In this case, there was an onsite trailer where potential beneficiaries attended daily meetings where a notice could have been posted. The Court found that this would serve as sufficient notice to the potential claimants. The Court concluded that where a beneficiary may be unreasonably disadvantaged, a duty will be imposed.

Justice Karakatsanis dissented, finding that no duty to notify existed. In her dissent, Justice Karakatsanis considered the context of labour and material payment bonds which have been commonly used in the construction industry for over 45 years. She found that trust language is included in the Bond for the purpose of avoiding problems associated with the third party beneficiary rule. The Bond narrowly defines the obligations placed on the trustee, who is not obliged to do or take action or proceeding against the surety on behalf of claimants, to enforce the provisions of the Bond. In her view, the industry understanding and practice has been for decades, that the trustee is under no obligation to disclose the existence of the trust to beneficiaries and that claimants are expected to enquire as to the existence of a bond.

She concluded that general trust law principles do not impose an obligation to notify potential claimants in this commercial context. Bird’s obligation was to respond accurately when asked about a bond. To find that a duty to notify exists in certain circumstances may impose different obligations on particular sectors or regions within the construction industry, and imposing such an unclear standard introduces uncertainty and instability in the industry.

In terms of the practical application of this new duty to notify, perhaps the most important consideration is, as Justice Karakatsanis notes, that the decision does not impose a universal duty to notify in all cases, which may result in uncertainty. The decision provides that the determination of whether a duty to notify arises in a particular case is highly fact-dependent. A consequence of this decision is the resulting uncertainty in the industry as to whether a duty to notify exists in a given scenario.

The Court found that a duty to notify will likely exist wherever it could be said to be to the “unreasonable disadvantage” of the beneficiary not to be informed of the Bond’s existence. The circumstances to be considered in determining whether a disadvantage is unreasonable include: the nature and terms of the trust and the social and business environment.

The bond trustee is left to determine whether a failure to disclose the bond will result in the beneficiary being disadvantaged in light of the terms of the trust and the social or business environment surrounding the project. In Valard, the Court determined that a labour and material payment bond was uncommon in the sector and that failure to disclose the existence of the trust prevented the beneficiary from making a timely claim. These subjective determinations present a risk to trustees under labour and material payment bonds who may, for example, be of the opinion that a surety bond is common within a particular sector, while a subcontractor may not share that view. A bond trustee who fails to provide notice leaves the door open to interpretation and exposes itself to potential litigation.

Owners and general contractors can avoid the risk of a claim from a subcontractor for failure to notify of the existence of a bond, by simply providing notice. In order to sufficiently discharge the duty to notify, owners and general contractors will want to establish clear guidelines and best practices, and adhere to them. The obligation to notify the beneficiaries involves taking reasonable steps such as posting labour and material bonds in an on-site trailer or in another location on site that is clearly visible and if there are multiple worksites, at each worksite; and electronically on a project website and/or email distribution list.

In addition, when a claimant writes to the owner or general contractor requesting information regarding the bond, any response should be provided in a timely manner and it would often make sense to copy the surety and enclose the bond in question.

Owners and general contractors will need to manage the risk associated with potential beneficiaries of a labour and material payment bond by developing practices to effectively notify beneficiaries in every instance where reasonable. An owner’s or general contractor’s ability to demonstrate that it made a genuine effort to notify beneficiaries will reduce the risk that a subcontractor will successfully claim for failure to notify of the existence of a labour and material payment bond.

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Compare jurisdictions:Litigation: Enforcement of Foreign Judgments

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